International Capital Movements.pptx

International Capital Movement and Multinational Corporations

1. International Capital Movements Prof. Nithin Kumar S Assistant Professor Department of Economics JSS Banashankari Arts, Commerce and Shantikumar Gubbi Science College Vidyagiri, Dharwad - 580004

2. International Capital movement Refers to the movement of capital from one Economy to the another International Capital Movement is the outcome of Globalization Globalization means opening up of the domestic market to the world Nithin Kumar 2 MEANING

3. Government and Private Capital Home and Foreign Capital Short Term and Long Term Capital Direct and Indirect Capital Foreign Aid Tied Aid Untied Aid Nithin Kumar 3 Types of International Capital Movements

4. The government capital refers to the lending and borrowing from foreign countries by the government of a given country. the lending made by the private individuals and institutions to the foreigners and borrowing by them from abroad signify the private capital. The private capital transfers from one country to another are many often guaranteed by the government or central bank of the borrowing country. Nithin Kumar 4 Government and Private Capital

5. The investments undertaken by the residents of the home country in foreign countries denote the home capital. the investments undertaken by the foreigners in the home country signify the foreign capital. In the first case, there is a movement of capital from home country to abroad in the latter case, there is a capital movement from abroad to the home country. Nithin Kumar 5 Home and Foreign Capital

6. Short- term international capital movements consist of such credit instruments that have a maturity of less than one year. The short term capital movements can take place through currency, demand deposits, bills of exchange, commercial papers and time deposits up to a maturity of one year. The long-term capital movements take place through credit instruments having a maturity of more than one year. Nithin Kumar 6 Short Term and Long Term Capital

7. Long-term capital movements occur through the purchase or sale of long term securities or bonds. These sales or purchases may be undertaken by the individuals or corporations in the foreign countries or by foreign individuals or corporations in the home country. The long- term capital movements may also take place in the form of loans procured from the international financial institutions such as IMF and IBRD. Nithin Kumar 7 Continued…

8. Direct Capital Refers to investment in a foreign country where the investor retain control over the investment Indirect Capital Movements are those investment which consists mainly of the holdings of transferable securities, shares and debentures by the nationals of the other country Nithin Kumar 8 Direct and Indirect Capital

9. Foreign aid , the international transfer of Capital, goods, or services from a country or International Organization for the benefit of the recipient country or its population. Aid can be economic, military, or emergency humanitarian (e.g., aid given following natural disasters). Nithin Kumar 9 Foreign aid

10. Tied Aid Tied aid is a foreign aid which is tied with one particular Project or programme Untied Aid Untied aid is not tied with any particular project or programme. There is no condition or restriction regarding the expenditure of the foreign aid Nithin Kumar 10 Continued…

11. The international capital movements or flows are influenced by the following main factors: Rate of Interest Speculation Expectations of Profit Cost of Production Bank Rate Government Policies Economic Conditions Marginal Efficiency of Capital Commercial Policy Political Conditions Nithin Kumar 11 Factors affecting International Capital Movement

12. Changes in capital both in short and long periods are greatly influenced by the changes in the rates of interest (short or long rates). In a country where the rate of Interest is very low, there the Capital Outflow Takes Place If in a country where the Rate of Interest is very high, in that economy capital inflow is very high because it yields high returns in the form of interest. Nithin Kumar 12 Rate of Interest

13. The speculative activities of the operators in the exchange market can also result in capital movements. Speculation may be with respect to either interest rates or exchange rates. When speculators anticipate a rise in interest rates in the home country relative to such an expectation abroad, the security prices are expected to fall by a greater extent in the home country than abroad. This will make the speculators transfer funds from home country to abroad. Nithin Kumar 13 Speculation

14. If the interest rates in home country are expected to fall more than in foreign country, the speculators will transfer funds from the foreign countries to the home country. Nithin Kumar 14 Continued…

15. The speculation in exchange rates too influences capital movements between the countries. If the currency of home country is expected to depreciate, the speculators will move funds from the home country to the foreign country, the currency of which is expected to rule stronger. An anticipated devaluation is likely to induce the flight of capital from the devaluing country. Nithin Kumar 15 Continued…

16. If the Investor expect that he may earn huge profit by investing in the foreign country, then the capital outflow takes place If more profit is expected in domestic market than that in the foreign market, then it prevents the capital outflow and increases the capital inflow. Nithin Kumar 16 Expectations of Profit

17. If the labour, raw materials are very cheap in the foreign nations, then the capital outflow takes place This is because of low cost of production in the foreign econ0my compared to the domestic Economy If the Labour, Raw materials in the domestic economy are cheaper when it is compared to the foreign economy it reduces the cost of production in the Domestic Economy It reduces the outflow of capital and increases the capital inflow from other countries Nithin Kumar 17 Cost of Production

18. The variations in bank rate by the central bank have effect upon the structure of interest rates in the money market. An increase in bank rate in the home country will cause a rise in both short-term and long-term interest rates. As these rates rise higher than the corresponding rates in the foreign countries, the home country will be able to attract short-term and long-term capital flows from abroad. Nithin Kumar 18 Bank Rate

19. A reduction in bank rate will lower the short and long term interest rates. As these rates fall below the levels of interest rates abroad, there will be outflow of capital to foreign countries. Nithin Kumar 19 Continued…

20. If the government policies like exchange rate control, tariff policy, monetary policy, fiscal policy etc… are in favor of foreign investors then capital inflow takes place If these government policies are against the foreign investors, then it will prevent the inflow of capital Nithin Kumar 20 Government Policies

21. On the other hand, if the policies of the foreign governments are in favor of the domestic investors, then the capital inflow takes place If the policies of the foreign governments are against to the domestic investors will restrict the capital outflow from the domestic Economy Nithin Kumar 21 Continued…

22. If the economic conditions are very good in the domestic economy, then it will lead to the Capital inflow If the economic conditions are comparatively good in the foreign economy, then the capital outflow takes place Good Economic conditions include well-developed economic infrastructure, including means of transport and communications, power, market structures and financial institutions Nithin Kumar 22 Economic Conditions

23. If the marginal efficiency of capital is high in the foreign nation and low in domestic economy, then capital outflow takes place If the marginal efficiency of capital is low in the foreign economy and high in domestic economy, then the capital outflow takes place Marginal Efficiency of Capital: MEC refers to the expected profitability of a capital asset. It may be defined as the highest rate of return over cost expected from the marginal or additional unit of a capital asset . Nithin Kumar 23 Marginal Efficiency of Capital

24. A policy of Free Trade will encourage International Capital Movements A Policy of Protection will have adverse effect on international Investments Nithin Kumar 24 Commercial Policy

25. Political factors like Political Stability, immigration rules and regulations affect the capital inflow and outflow If the above factors in favor of the Investing economy, then it will encourage the capital inflow If the political factors are against to the foreign investors will discourage the capital inflow and it may lead to capital outflow from domestic economy to the foreign economy Nithin Kumar 25 Political Conditions

26. Multinational Corporations (MNCs)

27. A powerful influence on patterns of world trade and factor movements is the multinational firm . A multinational corporation is a company with headquarters in one country or but they operate in many countries. Nithin Kumar 27 Meaning

28. David E Liliental – “Corporations Which have their home in one country but operate and live under the laws and customs of other countries as well” Nithin Kumar 28 Definitions

29. The foreign Exchange Regulation Act 1973 (FERA) of India – “A corporation incorporated in a foreign country or territory shall be deemed to be multinational corporation if such corporation: Is a subsidiary or a branch or has place of business in two or more countries or territories Carries on business or otherwise operations in two or more countries or territories ” Nithin Kumar 29 Continued…

30. Multinationals in the form of trading companies started in the 17 th and 18 th centuries The Hudson Bay Company, the East India Company, The French Levant Company were the Major transnational companies established in those days. During the 19 th century, huge foreign investment flowed from the western Europe to the underdeveloped countries of Asia, Africa and America Nithin Kumar 30 Origin and Growth of MNCs

31. There are Three Phases in the growth of MNCs The First Phase lasted up to the First World War Second Phase covering the decades of fifties and sixties Third Phase began since 1970s Nithin Kumar 31 Continued…

32. In the first phase the field was captured mostly by the European companies such as imperial tobacco, Dunlop, Philips etc. During the second phase of the growth of MNCs American MNCs such as General motors, Ford Motors, and IBM emerged on the world Scene. the third Phase European, German and Japanese Companies In Recent years MNCs have also emerged from developing countries such as India, Malaysia, Hong Kong, Singapore, South Korea, Indonesia etc. Nithin Kumar 32 Continued…

33. MNCs have Managerial headquarters in home countries, while they carryout operations in a number of other countries (Host Countries) A large part of capital assets of the parent company is owned by the citizens of the company’s home country The absolute majority of the members of the board of directors are citizens of the home country Nithin Kumar 33 Features of MNCs

34. The decisions on new investment and the local objectives are taken by the parent company MNCs are predominantly large – sized and exercise a great degree of economic dominance MNCs control production activity with large foreign direct investment in more than one developed and developing countries Nithin Kumar 34 Continued…

35. MNCs are oligopolistic in character. It is sustained by modern technologies, management skills, product differentiation and enormous advertising MNCs are not just participants in export trade without foreign investment. Nithin Kumar 35 Continued…

36. WORLD WIDE OPERATION The multinational companies extend their operation to two or more countries . CREATE MAXIMUM OPERATION The multinational companies are extended to many countries . People  can join the multinational companies according to their capabilities . Manpower can be well utilized in the multinational companies . Nithin Kumar 36

37. ADVANCED TECHNOLOGY Multinational companies invest a huge amount of money on research and development of latest technology . Therefore transfer advanced technology to developing countries through subsidiaries and branches HIGH EFFICIENCY Advanced technology are used are for multinational companies . So , manpower can give well training which increase efficiency of manpower . Due to this cause, the multinational companies can provide large volume of quality products at cheaper price . Nithin Kumar 37 Continued…

38. Monopolistic Market Generally, multinational companies supply large quantities of quality products and services in the international market . So they create a separate brand name and capture a large area of foreign market. Sometimes they even control a huge market through trade marks and patent right . Nithin Kumar 38 Continued…

39. Product/service organization A multinational company is based on product/service which produces a mass production of varieties of goods and services. The company consists own trade mark , patent right, copy right and technology for production and distribution of such goods in the international market . Nithin Kumar 39 Continued…

40. Ownership and control The ownership of such company is shared by both parent company and branch companies as per their capital investment . However parent company manages and control the operation of its branches and subsidiary through  trade mark, technology, and patent right. Nithin Kumar 40 Continued…

41. Expansion of Market Territory Market Superiority Financial Superiority Technological Superiority Product Innovation Nithin Kumar 41 Factors Contributing for the Growth of MNCs

42. MNCs helps the developing host country by increasing investment, income and employment in its country They contribute to the rapid process of development of the country through transfer of technology, finance and modern management MNCs promote professionalisation management in the companies of the host countries Nithin Kumar 42 Role of MNCs in Developing Countries

43. MNCs help in promoting exports of the host country MNCs by producing certain required goods in the host country help in reducing its dependence on imports MNCs due to their wide network of productive activity equalize the cost of production in the global market Nithin Kumar 43 Continued…

44. Entry of MNCs in the host country makes its market more competitive and break the domestic monopolies MNCs accelerate growth process in the host country through rapid industrialization and allies activities The growth of MNCs creates a positive impact on the business environment in the host country Nithin Kumar 44 Continued…

45. MNCs are regarded as agents of modernisation and rapid growth MNCs are the vehicles for peace in the world. They help in developing cordial political relations among the countries of the world MNCS bring ideas and help in exchange of cultural values Nithin Kumar 45 Continued…

46. MNCs through their positive attitude and efforts work for the establishment of social welfare institutions and improvement of health facilities in the host countries Growth of MNCs help in improving the balance of payments status of the host country The MNCs integrate national and international markets. Their growth in these days has remarkably influenced economic, industrial, social environment and business conditions. Nithin Kumar 46 Continued…

47. Advantages & Disadvantages of MNCs Nithin Kumar 47

48. Large Capital Flow Risk undertaking Managerial Benefits Superior Technology Marketing Techniques Socially Desirable Nithin Kumar 48 Advantages or Merits

49. High Profits Charge High Price Highly Paid Executives Social Inequality Pre-Empt Savings Outmoded Capital intensive Technology Social Inequalities Nithin Kumar 49 Disadvantages or Demerits

50. Thank You Nithin Kumar 50